PSA IHI (7013): Reducing Risk – ¥14bn Buffer Revisited
IHI (7013): Reducing Risk – ¥14bn Buffer Revisited
- FY17 OP could overshoot guidance by ¥13bn, we project, based on ¥5bn above plan OP from turbochargers and aero-engines, as well as ¥8bn from the guidance “buffer.”
- ¥14bn of the OP guidance “buffer” remained after a ¥2bn drawdown at Q1 for expected future costs in the Resources / Energy division.
- Additional drawdowns of the buffer appear likely for rising project costs in Resources / Energy, where the division’s OP guidance was reduced by ¥7bn at Q1 and we think may be reduced by another ¥5-6bn due to problems with N. American LNG plants and power systems.
- IHI is reducing risk sharply this year as it withdraws from F-LNG while gas processing (LNG) plants in N. America – which business will be shrunk but not withdrawn from – approach completion this year and next. Project risk remains in FY18, but if management this Q2 demonstrates a firm grasp of its problems, as we believe likely, then we think the shares may be re-rated to reflect FY18 forecasts and the company’s latent OPM capability in the 6-7% range. Note Q4 FY16 OPM was 6.2%, Q1 FY17 6.3%.
- Valuations on FY17 are average, as restructuring has yet to take hold: PER 21.4x, EV/OP 10.8x and PBR 1.8x on our numbers.
- Visibility and valuations improve from FY18, when the PER of 12.9x and 9.1x EV/OP underscore the positive longer-term earnings trend.
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
PSA produces both company and sector reports. The focus of PSA’s research is to identify winners and losers as new technologies impact the top and bottom lines of corporations. Critical to our research is the clear explanation of how these new technologies work and how they impact companies and industries.
The founding partners have worked closely together for twenty years and the team has more than doubled in size since 2012.
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